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CHAPTER 4 STRUCTURE OF A STANDARD

PART 1
IAS 16 Property, Plant & Equipment

IAS 40 Investment Property ✓PROBLEMS ADDRESSED

✓SCOPE OF THE STANDARD
IAS 38 Intangible Assets ✓ACCOUNTING CONCEPTS
✓ACCOUNTING TREATMENT
IAS 36 Impairment of Assets ✓PRESENTATION & DISCLOSURE

✓IAS 16
IAS 16 - PROBLEMS ADDRESSED
- SCOPE OF THE STANDARD
- ACCOUNTING CONCEPTS

PROBLEMS ADDRESSED ✓ PPE are tangible assets &

IAS 16 covers all aspects of accounting for PPE
+ This represents the bulk of items which are “tangible” NCA
SCOPE OF THE STANDARD
IAS 16 should be followed unless another IAS requires a
different treatment
EXCLUDE:
Biological assets (IAS 41- Agriculture)
- Are held for use in the production or supply of
goods or services, for rental to others, or for
administrative purposes
- Are expected to be used during more than 1 period
✓ COST
Is the amount of cash or cash equivalents paid or
the FV of the other consideration given to
acquire an asset at the time of its acquisition or
construction

PPE held for sale (IFRS 5 – NCA held for sale &
IAS 16 Discontinued Operations)
Mineral rights and mineral reserves (IFRS 6 -
Exploration for & Evaluation of mineral resources
✓ RESIDUAL VALUE
Is the net amount which the entity expects to obtain for
an asset at the end of its useful life after deducting the
expected costs of disposal.

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✓ CARRYING AMOUNT
Is the amount at which an asset is recognized in the
SOFP after deducting any accumulated depreciation &
accumulated impairment loss

✓ RECOVERABLE AMOUNT
HIGHER VALUE of: ✓IAS 16
a. The asset’s FV less costs of disposal
b. Its value in use - ACCOUNTING TREATMENTS
(present value)
IAS 36

✓ FAIR VALUE
Is the price that would be received to sell an asset ✓RECOGNITION
or paid to transfer a liability in an ORDERLY
TRANSACTION between market participants at the
✓INITIAL MEASUREMENT
measurement date (willing parties – arm’s length ✓SUBSEQUENT EXPENDITURE
transaction; IFRS 13)

INITIAL MEASUREMENT
COST OF PPE
RECOGNITION
✓ Purchase price (less any trade discount
or rebate)
a) It is probable that future economic ✓ Import duties and non-refundable
benefits associated with the asset purchase taxes
will flow to the entity
✓ Directly attributable cost
b) The cost of the asset to the entity (Brings asset to working condition for Intended Use)
can be measured reliably
✓ Initial estimate: Dismantling, Removing,
Restoring
✓ NON - COST
- Administration & other general overhead costs
- Start-up & similar pre-production costs
- Initial operating losses before asset reaches planned performance

Worked example: (P258)

SUBSEQUENT EXPENDITURE
DEPRECIATION SUBSEQUENT EXPENDITURE

✓ Costs of repairs - maintain Malcolm buys a building on 1.1.X0 for £200,000. On 1.1.X2 he adds an
existing performance: will extension that cost £50,000.
be treated as expenses Required:
Calculate the annual depreciation charge before and after the is built, on
the basis of straight line depreciation over 10 years, with no residual value

Before £ 200,000
= = £ 20,000 pa
✓ The cost of major improvements/ major overhauls/ upgrading extension 10
/extending useful life/ increasing capacity: may be capitalized
After £ 200,000 £ 50,000
= + = £ 26,250 pa
extension 10 8

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✓IAS 16 ACQUISITION

- ACCOUNTING TREATMENTS
USE
DISPOSAL

WHAT IS DEPRECIATION?
✓DEPRECIATION The systematic allocation of the cost of an asset, less
its residual value, over its estimated useful life.

FACTORS IN COMPUTING DEPRECIATION

DEPRECIATION METHODS

1. Straight line method

- = 2. Reducing balance method
3. The units - of - production method
Residual Value Depreciable Cost
Initial Cost (Salvage Value) 4. The sum - of - the digits method

Useful Life
The depreciation basis or method selected should be
applied consistently from period to period

Periodic Depreciation

REDUCING BALANCE METHOD

STRAIGHT LINE METHOD
✓This method reflects that some new NCAs
✓ The depreciable amount is charged in tending to lose more value in the earlier
equal instalments to each reporting years than the later years.
✓Calculates the depreciation charge as a
period over the useful life of the asset
fixed percentage of the carrying amount.

✓Annual calculations are:

✓Annual calculation is: Year One:
Cost of asset - Residual value Cost of asset * XX%
Useful Life of the Asset in years Year Two onwards:
(Cost of asset - depreciation to date) * XX%

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MEASUREMENT Accounting
AFTER RECOGNITION policy

REVALUATION
✓IAS 16 COST MODEL
MODEL
- ACCOUNTING TREATMENTS
COST REVALUED AMOUNT
-
(accumulated depreciation -
(FV on revaluation date)

✓SUBSEQUENT MEASUREMENT + impairment losses) (subsequent depreciation

+ impairment losses)

Movement
ACCOUNTING TREATMENT
REVALUATION (increase/ decrease)
MODEL ✓ INCREASE
other comprehensive income
(accumulated in equity as “revaluation
surplus”)
FAIR VALUE
(IFRS 13 — Fair Value Measurement) ✓DECREASE
✓ Must be measurable - expense in profit or loss, or
✓ IFRS 13 hierarchy of inputs applies - other comprehensive income (if
previous gain)
– Level 1 – quoted price of same item
– Level 2 – quoted price of similar item - adjust
✓ Subsequent accounting Transfer to retained earnings is allowed but not required
– Level 3 – unobservable inputs – Annually (depreciation difference)
– On disposal
Must not be “recycled” through profit or loss

EXAMPLE 1
On 1/1/2020, a building which cost 150,000; purchased 15
years ago, has been revalued to 180,000. Accumulated depreciation is
eliminated upon revaluation. At the time of purchase it had an
estimated useful life of 50 years.
What are the entries for the year- ended 31/12/2020?

Net Book value = Cost – Acc Depreciation

EXAMPLE 1 = 150,000 – 150,000/50* 15
= 150,000 – 45,000 = 105,000

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EXAMPLE 1 EXAMPLE 1
Accounting entries: Accounting entries:

Dr. NCA-Building 30,000

Dr. Acc Depreciation 45,000
Dep’ Expense Profit
Cr. Revaluation surplus 75,000
SHAREHOLDERS
Before 2020:
.
From 2020: Annual adjustment in the next 35 years:
.

EXAMPLE 2
Lucky company bought an asset for 15,000 at the beginning of
20X6. It had an useful life of 5 years. On Jan, 20X8 the asset
was revalued to 18,000. The expected useful life has remained
unchanged. Account for the revaluation and state the treatment
for depreciation from 20X8 onwards

EXAMPLE 2

EXAMPLE 3
1. Micky has an item of land carried in its books at 5,000. Two years ago a
slump in land values led the company to reduce the carrying amount from
10,000. This was taken as an expense in P/L. There has been a surge in
land prices in the current year, however, and the land is now worth 18,000
2. The original cost was 10,000, revalued upwards to 18,000 two years ago.
The value has now fallen to 5,000

EXAMPLE 3

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ĐỌC THAM KHẢO (Nguồn: BISC)

✓IAS 16
PRESENTATION & DISCLOSURE

✓DERECOGNITION

NON-CURRENT ASSET DISPOSALS NON-CURRENT ASSET DISPOSALS

• A disposal account is used to calculate the profit or loss on disposal of an

✓ The following items appear in the disposals account:
asset, which is the amount by which the sales proceeds of the asset differs
✓ The value of the asset (at cost)
from its carrying amount at the date of disposal.
✓ The accumulated depreciation up to the date of sale
• When an old asset has been attributed an NRV when given in part-
✓ The disposal proceeds, if any The profit or loss on disposal is the
exchange for a new one, the part-exchange value is accounted for as the old
difference between:
asset's disposal proceeds.
• The disposal proceeds and
• The carrying amount of the asset at the time of disposal.

Sales of Non-Current Asset SALES OF AN ASSET

Cost = 10.000 Proforma £ £

Acc’ Dep = 7.000 Net Sale Price X
Sales of Car:
- BLUE: pay 4,000 Cost of Asset X
- RED pay 2,800 Less Acc Depreciation to date (x)
CA at date of disposal (X)
Profit/(Loss) On Disposal X

1. Carrying amount (CA) of asset at time of sale = Positive therefore a profit i.e. Sale price > CA
2. Net Sale price (sale price – costs to make sale) = Negative therefore a loss i.e. Sale price < CA

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ACCOUNTING ENTRIES

(1) DEBIT Disposal account £X

CREDIT NCA cost account £X Non-current asset disposals
with the cost of the asset disposed of (the cost of the asset is removed from WORKED EXAMPLE – page 267, 268, 269
the SOFP).
(2) DEBIT Accumulated depreciation account £X
CREDIT Disposal account £X
with the accumulated depreciation on the asset as at the date of sale (the
accumulated depreciation on the asset is removed from the SOFP).
(3) DEBIT Cash at bank (or receivables) £X
CREDIT Disposal account £X
with the disposal proceeds of the asset.

EXAMPLE ACCOUNTING FOR PART- EXCHANGE DISPOSAL

A business purchased two rivet-making machines on 1 January 20X5 at a cost of
$15,000 each. Each had an estimated life of five years and a nil residual value.
The straight line method of depreciation issued.
Owing to an unforeseen slump in market demand for rivets, the business
decided to reduce its output of rivets, and switch to making other products
instead. On 31 March 20X7, one rivet-making machine was sold (on credit) to a
buyer for $8,000.
Later in the year, however, it was decided to abandon production of rivets
altogether, and the second machine was sold on 1 December 20X7 for $2,500
cash.
Required:
Prepare the machinery account, depreciation of machinery account and disposal
of machinery account for the accounting year to 31 December 20X7.
WORKED EXAMPLE (P271):
PART-EXCHANGE PART II
A business trades in an asset that cost £30,000 two years ago
for a new asset that costs £60,000. A cheque for £41,000 was
also handed over in full settlement.
Assets are depreciated on the straight line basis over 5 years
Requirement:
What are the relevant ledger account entries?
IAS 16 states that the cost of an item obtained through (part) exchange is the
fair value of the asset received (unless this cannot be measured reliably).

DISCLOSURES
✓Each class
• Measurement bases
• Depreciation methods
✓IAS 16 • Useful lives or depreciation rates
PRESENTATION & DISCLOSURE • Reconciliation of carrying amounts
✓Other disclosures
• Restrictions on title/assets pledged as security
• Expenses on assets in the course of
construction
• Contractual commitments
• Compensation from third parties

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DISCLOSURES
Revalued items
• Effective date of revaluation
• Whether independent valuer involved
• Capital commitments IAS 16 - PRACTICES
• Revaluation surplus – movements
and restrictions on distribution

QB 24 –p9 QB 30 –P10
Foster has built a new factory incurring the following costs:
$'000 • Wetherby purchased a machine on 1 July 20X7 for $500,000.
Land 1,200 • It is being depreciated on a straight line basis over its
Materials 2,400
expected life of 10 years. Residual value is estimated at
Labour 3,000
Architect's fees 25 $20,000.
Surveyor's fees 15 • On 1 January 20X8, following a change in legislation,
Site overheads 300 Wetherby fitted a safety guard to the machine. The safety
Apportioned administrative overheads 150
Testing of fire alarms 10 guard cost $25,000 and has a useful life of 5 years with no
Business rates for first year 12 residual value.
7,112 • What amount will be charged to profit or loss for the year
What will be the total amount capitalised in respect of the factory?
A. $6,112,000 ended 31 March 20X8 in respect of depreciation on this
B. $6,950,000 machine?
C. $7,112,000
D. $7,100,000

QB 31 –P11
QB 30 –P10
• Auckland Co. purchased a machine for 60,000 on 1,
Jan, 20X7 and assigned it a useful life of 15 years
• On 31, Mar 20X9 it was revalued to 64,000 with no
change in useful life
• What will be depreciation charge in relation to this
machine in the financial statements of Auckland Co
for the year ending 31, Dec 20X9?

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IAS 36

CHAPTER 4
PART 1 IAS 36 - IMPAIRMENT
IAS 16 Property, Plant & Equipment

IAS 40 Investment Property

IAS 38 Intangible Assets

IAS 36 Impairment of Assets

STRUCTURE OF A STANDARD

✓PROBLEMS ADDRESSED
✓SCOPE OF THE STANDARD
✓ACCOUNTING CONCEPTS
✓ACCOUNTING TREATMENT
✓PRESENTATION & DISCLOSURE
✓IAS 36
- PROBLEMS ADDRESSED
- SCOPE OF THE STANDARD
- ACCOUNTING CONCEPTS

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PROBLEMS ADDRESSED INDICATIONS OF IMPAIRMENT

+ Prudence principle: assets should not be carried over their
recoverable amount
+ Account for impairment loss as well as reversal of impairment loss
At the end of each reporting period, a business is
required to assess if there is any indication that
an asset may be impaired (IAS 36: para 9.)

SCOPE OF THE STANDARD

✓ External indicators of impairment: ✓ Internal indicators
IAS 36 applies to all tangible, intangible & financial assets – A fall in the asset's market value that is more of impairment:
than is expected as a result of passage of time – Evidence of
EXCLUDE: or normal use. obsolescence or
Inventories; assets arising from construction – A significant change in the technological, physical damage.
contracts, deferred tax assets… market, legal or economic environment of the – Adverse changes in
business in which the assets are employed. the use to which the
IAS 36 Assets arising under IAS 19 (Employee benefits) - An increase in market interest rates or market asset is put, or the
rates of return on investments likely to affect economic performance
Financial assets within IAS 32 (Financial instruments)
the discount rate used in calculating value in use
NCA held for sale in IFRS 5 (NCA held for sale & – The carrying amount of the entity's net assets
discontinued operation) being more than its market capitalisation.

REVIEWING AND CHANGING IMPAIRMENT LOSS

USEFUL LIFE OR RESIDUAL VALUE
AFTER IMPAIRMENT CA of an asset exceeds
its recoverable amount,
an impairment loss is
When an impairment loss is recognised, said to have occurred.
the asset's remaining useful life and residual value
should also be reviewed and revised if appropriate. CARRYING Compared with RECOVERABLE
AMOUNT AMOUNT
Note:
Test for impairment annually even no indications
(a) An intangible asset with an indefinite useful life
(b) Goodwill acquired in a business combination Fair value less
and Value in use
costs to sell

CARRYING Compared with RECOVERABLE

AMOUNT AMOUNT

HIGHER OF

Fair value less and Value in use

✓IAS 36
costs to sell
- ACCOUNTING TREATMENTS
the present value
of the future cash
flows expected to
flow from the
asset.

Impairment loss = carrying amount - recoverable amount

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CALCULATING AND ACCOUNTING FOR AN IMPAIRMENT LOSS
CALCULATION
Carrying amount of the asset
Less recoverable amount of the asset
WORKED
Impairment and depreciation
EXAMPLEP p266
A business purchased a building on 1 Jan 20X1 at a cost of £100,000;
20-year useful life, annual depreciation = £100,000/20 = £5,000 pa
£ At 31 Dec 20X5: Cost =100,000
X Acc dep = 25,000
(X) → Carrying amount at 31 Dec 20X5 = 75,000

Impairment loss
ACCOUNTING FOR IMPAIRMENT LOSS
When an asset has suffered an impairment loss:
DR. Impairment expense (statement of profit or loss)
CR. Carrying amount of asset (statement of financial position)
X ✓ During 20X5, property prices fell sharply indicating that the building may be
impaired
✓ On 31 Dec 20X5, the business undertook an impairment review and determined:
- FV less disposal costs of £60,000
Value in use of £50,000.
→ The recoverable amount £60,000.
£X - Impairment loss at 31 Dec 20X5:
£X → CA of the building at 31 Dec 20X5 75,000
Recoverable amount at 31 Dec 20X5 (60,000)
Impairment loss 15,000

INTERACTIVE
WORKED QUESTION 5 – p 267
EXAMPLEP p266
On 1 Jan 20X1 Tiger buys a NCA for £120,000, useful life of 20 years and no residual
value, straight line basis. On 31 Dec 20X3 the asset has a CA calculated as follows:
✓ The business should therefore reduce the carrying amount of the NCA at cost 120,000
Accumulated depreciation (3 x(£120,000/20)) (18,000)
building to £60,000 and charge the impairment loss of £15,000 to
CA 102,000
profit or loss. Requirements
✓ In 20X6, depreciation = £60,000 / 15 years = £4,000 per annum Consider each of these alternatives separately.
(a) On 31 Dec 20X3, the remaining useful life is revised to 15 years from that date.
✓ At 31 Dec 20X6, the carrying amount of the building would be:
Calculate the revised annual depreciation charge commencing in 20X4.
Cost of the building in 1 Jan 20X6: £ 60,000 (b) On 31 Dec 20X3 the remaining useful life is revised to 10 years from that date. An
Accumulated depreciation at 31 Dec 20X6 (4,000) impairment review has been carried out which shows that the fair value less costs of
Carrying amount at 31 Dec 20X6 56,000 disposal are £80,000 and the value in use is £95,000 as at 31 Dec 20X3.
Show how the impairment loss would be recorded in the FS for the year
ended 31 Dec 20X3 and calculate the revised annual depreciation charge
commencing in 20X4.

INTERACTIVE
QUESTION 5 – p 267

(a) Revised annual depreciation charge from 20X4

Revised annual charge = Carrying amount at revision – Residual value
Revised remaining life = £ 102,000/15 = £ 6,800 per annum
(b) Impairment loss and revised annual depreciation charge
Recoverable amount: FV less costs of disposal of £ 80,000
✓IAS 36
and the value in use of £ 95,000
CASH- GENERATING UNIT
→ Recoverable amount 95,000
Carrying amount at 31 Dec 20X3 102,000
Impairment loss 7,000
Accounting for impairment loss of £7,000:
DR P/L impairment loss 7,000
CR PPE carrying amount 7,000
Impairment loss on non-current asset
The revised annual depreciation charge from 20X4 is then calculated as:
£ 95,000/10 = £ 9,500

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✓IAS 36
CASH- GENERATING UNIT A cash-generating unit is the smallest identifiable
group of assets for which independent cash flows can
When it is not possible to calculate
be identified and measured.
the recoverable amount of a single
asset, then that of its cash-
generating unit should be measure
instead Nhóm nhỏ nhất có thể xác định của các
tài sản tạo ra dòng tiền vào và gần như
độc lập với dòng tiền vào từ các tài sản
A cash-generating unit is the smallest identifiable
hoặc nhóm tài sản khác
group of assets for which independent cash flows can
be identified and measured.

EXAMPLE 1 • A mining enterprise owns a private railway to support its mining activities.
Can you think of some examples of how a cash-
generating unit would be identified? The private railway can be sold only for scrap value and the private
railway doesn't generate cash inflows from continuing use that are largely
• Here are two possibilities. independent of the cash inflows from the other assets of the mine.
(a) A mining company owns a private railway that it uses to transport output
from one of its mines. The railway now has no market value other than as Problem Solution Implementation
scrap, and it is impossible to identify any separate cash inflows with the use of It isn't possible to The entity needs to Create a cash-
the railway itself. Consequently, if the mining company suspects an impairment estimate estimate the generating unit
in the value of the railway, it should treat the mine as a whole as a cash the recoverable recoverable amount of representing the entire
generating unit, and measure the recoverable amount of the mine as a whole.
amount of the private the cash generating unit mining enterprise so that
(b) A bus company has an arrangement with a town's authorities to run a bus railway because to which the railway the impairment loss can
service on four routes in the town. Separately identifiable assets are allocated its value in use can't be provides service (the be calculated for the
to each of the bus routes, and cash inflows and outflows can be attributed to
each individual route. Three routes are running at a profit and one is running determined, and mine as a whole). mine as a whole and
at a loss. The bus company suspects that there is an impairment of assets on probably is different allocated to all assets in
the lossmaking route. However, the company will be unable to close the loss- from its value as scrap. that cash-generating
making route, because it is under an obligation to operate all four routes, as unit.
part of its contract with the local authority. Consequently, the company should
Create a cash-generating unit representing the entire mining enterprise so
treat all four bus routes together as a cash generating unit, and calculate the
recoverable amount for the unit as a whole. that the impairment loss can be calculated for the mine as a whole and
allocated to all assets in that cash-generating unit.

EXAMPLE 2 (CGU) ANSWER

• Minimart belongs to a retail store chain Maximart.
Minimart makes all its retail purchases through
Maximart's purchasing centre. Pricing, marketing,
advertising and human resources policies (except for
hiring Minimart's cashiers and salesmen) are decided by
Maximart. Maximart also owns five other stores in the
same city as Minimart (although in different
neighbourhoods) and 20 other stores in other cities. All
stores are managed in the same way as Minimart.
Minimart and four other stores were purchased five
years ago and goodwill was recognised. Required What
is the cash-generating unit for Minimart?
• In identifying Minimart's cash-generating unit, an entity
considers whether, for example:
(a) Internal management reporting is organised to
measure performance on a store-by-store basis.
(b) The business is run on a store-by-store profit basis or
on a region/city basis. All Maximart's stores are in
different neighbourhoods and probably have different
customer bases. So, although Minimart is managed at a
corporate level, Minimart generates cash inflows that are
largely independent from those of Maximart's other
stores. Therefore, it is likely that Minimart is a
cashgenerating unit.

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Testing
cash-generating units with goodwill
for impairment

✓IAS 36
➢ In a business combination:
CASH- GENERATING UNIT
- Goodwill not generate cash flows independently
- It must be allocated to CGU expected to benefit from the
synergies of the combination
- CGU to which goodwill has been allocated must be tested
for impairment annually
ACCOUNTING TREATMENTS
➢The carrying amount of the unit (including goodwill) –
COMPARE – the recoverable amount

ACCOUNTING TREATMENTS ACCOUNTING TREATMENTS

Recoverable amount < carrying amount Recoverable amount < carrying amount

→ This loss should be recognised immediately.

(a) The asset's carrying amount should be reduced to its → means that impairment has occurred
recoverable amount in the statement of financial position.
→Journal entry:
(b) The impairment loss should be recognised immediately in
P/L(unless the asset has been revalued in which case the loss is Dr Profit or loss
treated as a revaluation decrease). (or Dr Revaluation surplus of impaired asset)
→ After reducing an asset to its recoverable amount, the
depreciation charge on the asset should then be based on its new Cr Asset
carrying amount, its estimated residual value (if any) and its With the difference in amounts (impairment loss)
estimated remaining useful life.

Example 3:
ACCOUNTING TREATMENTS
Allocation of impairment loss
• Order of allocation of impairment between assets (after
accounting for any specific A cash-generating unit comprises the following:
impairments) $m
– Goodwill, if any Building 30
– Other assets on a pro-rata basis but Plant and equipment 6
No asset should be reduced below the higher of Goodwill 10
• Fair value less cost of disposal Current assets 20
• Value in use
• Zero
Current assets do not bear any of the impairment loss as ➔ Following a recession, an impairment review has estimated
they will already be measured at a current value the recoverable amount of the CGU to be $50m.
➔ How do we allocate the impairment loss?

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• The loss will be applied first against the goodwill ACCOUNTING TREATMENTS
• and then against the tangible non-current assets on a pro-
rata basis.
• Review impaired assets each year if indications of
• After writing off the goodwill, the balance to be allocated is
$6m. This is pro-rated over the total of $36m for the – further impairment
remaining non-current assets at a rate of $1m per $6m. – impairment reversal
• Reversals of impairment losses
Carrying Impairment CA post- • Only reverse if original factors of impairment no longer
amount loss impairment apply
Building 30 • Credit to profit or loss if original impairment was expensed
Plant and equipment 6 there
Goodwill 10
Cannot reverse impairment of goodwill
Current assets 20
Cannot increase carrying amount to more than
Total 66
depreciated cost if impairment had not occurred

IAS 36 - DISCLOSURES
✓Disclosure by class of assets: [IAS 36.para126]
✓impairment losses recognised in profit or loss
✓ impairment losses reversed in profit or loss
✓IAS 36 ✓ which line item(s) of the statement of comprehensive
income
PRESENTATION & DISCLOSURES ✓ impairment losses on revalued assets recognised in other
comprehensive income
✓ impairment losses on revalued assets reversed in other
comprehensive income
✓Disclosure by reportable segment: [IAS 36.para 129]
✓impairment losses recognised
✓ impairment losses reversed
✓Other disclosures
Source: https://www.iasplus.com/en/standards/ias/ias36

CHAPTER 4
PART 1
IAS 16 Property, Plant & Equipment

IAS 40 Investment

IAS 40 Property
IAS 38 Intangible Assets

IAS 36 Impairment of Assets

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STRUCTURE OF A STANDARD

IAS 40 INVESTMENT
✓PROBLEMS ADDRESSED
✓SCOPE OF THE STANDARD
PROPERTY ✓ACCOUNTING CONCEPTS
✓ACCOUNTING TREATMENT
✓PRESENTATION & DISCLOSURE

PROBLEMS ADDRESSED
+ IAS 40 Investment Property applies to the accounting for property (land
and/or buildings) held to earn rentals or for capital appreciation (or both)
+ measured using a cost model or fair value model,

✓IAS 40 SCOPE OF THE STANDARD

IAS 40 applies to investment properties
- PROBLEMS ADDRESSED
- SCOPE OF THE STANDARD EXCLUDE:
Owner-occupied property under IAS 16
- ACCOUNTING CONCEPTS
NCA held for sale in IFRS 5; Inventories in IAS 2
Leases within IFRS 16
IAS 40
Property being constructed or developed (IFRS15)
Biological assets (IAS 41- Agriculture)
Mineral rights and mineral reserves (IFRS 6 -
Exploration for & Evaluation of mineral resources

DEFINITIONS
INVESTMENT PROPERTY
is property (land or a building – or part of a
building – or both) held (by the owner or by the
lessee under a finance lease) to earn rentals or for
capital appreciation or both, rather than for:
(a) Use in the production or supply of goods or services
or for administrative purposes, or
(b) Sale in the ordinary course of business.
OWNER-OCCUPIED PROPERTY
EXAMPLE: YES/NO for Investment Property
YES NO Ref
1. Land held for long-term capital appreciation rather
than for short-term sale in the ordinary course of business
2. Land has been decided to keep and sell when its value
has risen
3. A building owned by the reporting entity (or held by
the entity under a finance lease) and leased out under an
operating lease
4.Property intended for sale in ordinary course of
business

is property held by the owner (or by 5. A building held by a parent and leased to a
subsidiary.
the lessee under a finance lease) for
6.Owner-occupied properties
use in the production or supply of
7.Property being constructed or developed on behalf of
goods or services or for third parties
administrative purposes 8. Property that is being constructed or developed for
future use as an investment property

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INITIAL MEASUREMENT
RECOGNITION ✓ An investment property should be measured initially at its cost,
including transaction costs
a) It is probable that future
economic benefits
✓ A right-of-use asset classified as an investment property should
be measured in accordance with IFRS 16
associated with the
INVESTMENT PROPERTY will
flow to the entity SUBSEQUENT MEASUREMENT
b) The cost of the INVESTMENT
IAS 40 requires an entity to choose
PROPERTY to the entity can between two models:
be measured reliably
✓ Cost model

✓ Fair value model

FAIR VALUE MODEL QB 27-p10: Investment Property

A. After initial recognition, an entity that chooses the FV model should
measure all of its investment property at FV, except in the extremely
rare cases where this cannot be measured reliably. In such cases it
should apply the IAS 16 cost model.
B. A gain or loss arising from a change in the FV of an investment
property should be recognised in net profit or loss for the period in
which it arises.
C. The FV of investment property should reflect market conditions at the
end of the reporting period.
Which one of the following would be recognised as an investment
property under IAS 40 in the consolidated financial statements of
Buildco?
A. A property intended for sale in the ordinary course of business
B. A property being constructed for a customer
C. A property held by Buildco under a finance lease and leased out
under an operating lease
D. A property owned by Buildco and leased out to a subsidiary

QB 28-p10: Investment Property

Identify whether the following statements are T/F in
QB 32-p11: Investment Property
accordance with IAS 40?
A. Following initial recognition, investment property can be held
at either cost or fair value.
B. If an investment property is held at fair value, this must be
applied to all of the entity's investment property.
C. An investment property is initially measured at cost, including
transaction costs.
D A gain or loss arising from a change in the fair value of an
investment property should be recognized in the revaluation
surplus
• Carter vacated an office building and let it out to a
third party on 30 June 20X8.
• The building had an original cost of $900,000 on 1 Jan
20X0 and was being depreciated over 50 years.
• It was judged to have a fair value on 30 June 20X8 of
$950,000. At the year end date of 31 December 20X8
the fair value of the building was estimated at $1.2
million.
• Carter uses the fair value model for investment property.
• What amount will be shown in revaluation surplus at 31
December 20X8 in respect of this building?

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QB 32-p11: Investment Property

• Cost 1.1.X0 900,000

• Depreciation to 30.6.X8 (900,000 × 8.5 / 50) (153,000) ✓IAS 40
• Carrying amount 30.6.X8 747,000
• Revaluation surplus 203,000 TRANSFER
• Fair value 30.6.X8 950,000 DERECOGNISION
• The increase of (1,200 – 950) = $250,000 arising between
30.6.X8 and 31.12.X8 will be credited to profit or loss in
accordance with IAS 40.
ACCOUNTING TREATMENTS

TRANSFERS DERECOGNISE
• Derecognise (eliminate from the statement of financial position) an investment
property on disposal or when it is permanently withdrawn from use and no
✓ Transfers to or from investment property should
future economic benefits are expected from its disposal.
only be made when there is a change in use.
✓ For example, owner occupation commences so • Any gain or loss on disposal is the difference between the net disposal
the investment property will be treated under
proceeds and the carrying amount of the asset. It should generally be
recognised as income or expense in profit or loss.
IAS 16 as an owner-occupied property.
• Compensation from third parties for investment property that was impaired,
lost or given up shall be recognised in profit or loss when the compensation
✓ When there is a transfer from investment property carried at fair value to becomes receivable
owner-occupied property or inventories, the property's cost for subsequent
accounting under IAS 16 or IAS 2 should be its fair value at the date of change
of use.
✓ Conversely, an owner-occupied property may become an investment property
and need to be carried at fair value. An entity should apply IAS 16 up to the
date of change of use. It should treat any difference at that date between the
carrying amount of the property under IAS 16 and its fair value as a
revaluation under IAS 16

EXAMPLE: Transfer to Investment Property Solution

• A business owns a building which it has been using as a head
office.
• In order to reduce costs, on 30 June 20X9 it moved its head
office functions to one of its production centres and is now
letting out its head office.
• Company policy is to use the fair value model for investment
property.
• The building had an original cost on 1 January 20X0 of
$250,000 and was being depreciated over 50 years.
• At 31 December 20X9 its fair value was judged to be
$350,000.
• How will this appear in the financial statements at 31
December 20X9?
• The building will be depreciated up to 30 June 20X9.
Original cost 250,000
Depreciation 1.1.X0 – 1.1.X9 (250/50 * 9) = (45,000)
Depreciation to 30.6.X9 (250/50 * 6/12) = (2,500)
Carrying amount at 30.6.X9 202,500
Revaluation surplus 147,500
Fair value at 30.6.X9 350,000
✓The difference between the CA and FV is taken to a revaluation
surplus in accordance with IAS 16.
✓ However the building will be subjected to a fair value exercise at
each year end and these gains or losses will go to profit or loss.
✓If at the end of the following year the fair value of the building is
found to be $380,000, $30,000 will be credited to profit or loss.

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IAS 16 Property, Plant & Equipment

IAS 38
IAS 40 Investment Property

IAS 38 Intangible Assets

IAS 36 Impairment of Assets

CHAPTER 4
PART 1

STRUCTURE OF A STANDARD
IAS 38 – INTANGIBLE ASSETS
✓PROBLEMS ADDRESSED
✓SCOPE OF THE STANDARD
✓ACCOUNTING CONCEPTS
✓ACCOUNTING TREATMENT
✓PRESENTATION & DISCLOSURE

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